I'm not a Hedging specialist either but I thought I'd dig around as I do like to understand it.
This is just scratching the surface so if anyone else is familiar then please jump in
From this article:
https://au.news.yahoo.com/world/a/3...ounds-to-45-u-s-drillers-begin-to-hedge-anew/
Matador Resources said this week it had added to its hedges over the past two weeks, but did not say by how much. It now has 43 percent of its estimated 2016 oil output hedged at weighted average floor and ceiling prices of $44 and $66.
It seems to be a pretty broad range so I looked further.
Firstly a definition:
Crude Oil Hedger
A hedger in the crude oil market is an individual who uses the futures market to offset price risk when intending to sell or buy the actual crude oil. Hedging is possible because the crude oil cash prices and crude oil futures prices tend to move in the same direction. However, the difference between the cash price and the futures price may narrow or widen. The change in the difference between the cash price and the futures price is called basis risk. Because of the changing basis no hedge can be perfect.
Where can you hedge crude oil? Crude oil can be hedged on the New York Mercantile Exchange (NYMEX). The NYMEX offers a competitive and transparent market place to engage in efficient hedging strategies. If you are interested in hedging crude oil please contact us. One of our experienced crude oil traders will be happy to give you a call to discuss hedging strategies with you.
What is a Crack Spread? A crack spread is a term used in the oil industry and futures trading for the differential between the price of crude oil and petroleum products extracted from it - that is, the profit margin that an oil refinery can expect to make by "cracking" crude oil (breaking its long-chain hydrocarbons into useful shorter-chain petroleum products). Refiners wishing to hedge their price exposures use crack spreads. One of the most important factors affecting the crack spread is the relative proportion of various petroleum products produced by a refinery
Then a look for prices:
A brief search (during my lunch break) found some info on Futures and the prices sort of follow what we think about hedging.
The Futures price for Brent looking on NYMEX seems to go out to 2019 – Brent is $48.31 if you want to hedge that far out now.
BB FUT NYMEX BRENT FINANCIAL FUTURES
APR16 ---- ---- 33.27 - 1.42 ---- ---- 177 UNCH
MAY16 ---- ---- 33.97 - 1.32 ---- ---- 30 UNCH
JUL16 ---- ---- 35.39 - 1.25 ---- ---- 16 UNCH
AUG16 ---- ---- 36.10 - 1.24 ---- ---- 40 UNCH
SEP16 ---- ---- 36.79 - 1.22 ---- ---- 24 UNCH
DEC16 ---- ---- 38.62 - 1.16 ---- ---- 5885 UNCH
DEC17 ---- ---- 43.24 - 1.02 ---- ---- 434 UNCH
DEC18 ---- ---- 46.13 - 1.01 ---- ---- 231 UNCH
DEC19 ---- ---- 48.31 - 0.96 ---- ---- 258 UNCH
TOTAL BB FUT 7095
Details were retrieved from
http://www.cmegroup.com/daily_bulletin/current/Section61_Energy_Futures_Products.pdf
But beware – everything under the sun is shown here – had to look for Brent to find our closest equivalent.
So currently it would appear that Futures to 2019 are close to $50 – but this could change up/down at a moments notice based on market sentiment.
I'd like to know more, so I'll dig around in the little spare time I have.
(20min delay)